After a tumultuous year in US politics, the implications of the 2020 presidential election for structured finance are coming into focus. US economic and regulatory policy is set to shift following the election of former vice president, Joe Biden, as the next president – according to Mayer Brown partners, Amanda Baker, Andrew Olmem and Jon Van Gorp.
The Biden administration is expected to bring a more favourable view toward regulation of US financial markets. Where Donald Trump's administration sought to curtail what it saw as the excesses of the Dodd-Frank Act and other post-2008 financial crisis reforms, the Biden administration has indicated it will seek to expand on the regulatory framework established by Dodd-Frank.
Although the significance and extent of the policy shift are yet to be seen, it is clear US financial regulatory policy will be redirected by the election results.
The selection of former Federal Reserve board chair, Janet Yellen, as Biden's nominee for treasury secretary reinforces the view that financial-services policy will reflect a resumption of the Barack Obama government's approach to financial regulation.
As Fed chair, Yellen strongly supported Dodd-Frank and vigorously implemented its provisions. She has also been an outspoken opponent of many of the Trump administration's actions to ease the regulatory burden. In particular, she has stated that the Financial Stability Oversight Council (FSOC), the body of regulators charged by the Dodd-Frank Act with monitoring systemic risk, needs to be reinvigorated.
The FSOC has authority to designate nonbank firms located in the US for regulation by the Fed as well as to make recommendations to other financial regulators on where regulation needs to be enhanced. The FSOC is chaired by the treasury secretary, providing Yellen with the authority to direct its agenda going forward.
Given both the Fed and the Securities and Exchange Commission (SEC) have recently identified the reliance on short-term funding by US nonbank mortgage-finance companies as a destabilising factor during the COVID-19 economic shock, it is likely Yellen will direct the FSOC to consider the need for new prudential regulations for US nonbank mortgage lenders and servicers.
Of particular interest to structured-finance markets is whether the Biden administration will seek to roll back recent reforms aimed at strengthening US capital markets, including reforms of the Volcker rule and new "true lender" or "valid when made" rules designed to facilitate the transfer of consumer loans in the secondary market.
Under the Biden administration, the Consumer Financial Protection Agency could also impose additional regulations on consumer lending, especially with respect to private student loans. President Biden has signalled his support for addressing the rising level of student-loan debt owed by Americans.
The Biden administration has not yet indicated how, or indeed whether, it intends to address the decade-long conservatorship of government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac. The Trump administration had sought to return these mortgage-securitisation companies to private ownership.
The uncertainty around the future of the GSEs is heightened by an ongoing lawsuit that was recently heard by the US Supreme Court. The court has to decide both whether the director of the Federal Housing Finance Authority, which is the regulator of the GSEs, can be removed by the president at will, and whether the contractual terms of federal-government financial support for the GSEs, whereby the federal government receives all of the earnings of the companies, are valid.
A decision in the case is expected by June and, depending on how the court rules, it could prompt the Biden administration to undertake reform of the GSEs.
IN THE BALANCE
Control of the US Senate rested on two special elections in early January for Senate seats in the state of Georgia. Having won both these run-off contests, Democrats now control the Senate – although only because of vice president Kamala Harris's tie-breaking vote. As such, Congress will likely be very active in 2021 as Democrats may seek to use their narrow majority in the House of Representatives and control of the Senate to pass a wide range of legislation. This potentially includes efforts to reverse the Trump administration's tax cuts as well as new environmental legislation.
If Republicans had won one or both of the two Georgia Senate seats they would have continued to control the Senate and thus limit the scope of legislation that could secure passage. Either way, Congress was set to pass significant infrastructure legislation in the next year as there is bipartisan support for improvement in this area.
If such legislation is passed, it will likely include funding for renewable-energy initiatives including solar-energy adoption and research. This would spur loan-backed asset-backed securities (ABS) issuance in the US.
With respect to fiscal policy, the structured-finance market can expect that the Biden administration and Congress will continue to combat the impact of COVID-19 from a health and economic perspective with additional regulatory and spending measures.
Congress and financial regulators will likely continue to assess the need for mortgage-foreclosure moratoriums, and mortgage and student-loan forbearance programmes. Meanwhile, Congress and the Biden administration will weigh whether and how much additional economic stimulus is needed.
Both determinations will likely depend on future data on the pandemic's infection rate and the condition of the US economy. In addition, despite the US's debt-to-GDP ratio reaching a level not seen since World War II, interest rates remain low as the Fed has signaled its determination to support the economy until it recovers from the COVID-19 shock.
Although some concerns have been raised about US debt levels, the US government is unlikely to modify its accommodative fiscal policy until the economy has recovered more fully.
There is always uncertainty when a new administration comes into office but, unlike the change of administration from president Bush to president Obama, structured finance is much less of a policy focus now than it was on the heels of the global financial crisis – when US subprime mortgage lending was targeted as the root cause of severe economic fallout.
This focus on regulating structured finance had a global impact. Many of the new US regulations affected Australian structured-finance issuance into the US via regulation of Australian issuers and US investors.
The expected impact of the Biden administration on the Australian structured-finance market will be more indirect. The incoming government's policies are unlikely to alter, in the near term, the global economic forces that have driven interest rates to a record low in the US and that have increased the demand for structured-finance securities more generally – as fixed-income investors hunt for yield not available from purchases of government-issued securities.
This increased demand should be favourable for Australian residential mortgage-backed securities (RMBS), which are among the best-performing ABS in the world.
While we do not anticipate credit-risk retention going away in the US, or anywhere globally for that matter, the incoming Biden administration has given no indication that it supports further expansion of these rules in the US.
Finally, while the expected increased focus on consumer regulatory protection for US consumers under a Biden administration will not extend to Australian consumers and their financial obligations, a general focus on protecting consumers from unsavoury, unfair, deceptive and abusive products will likely be a global regulatory phenomenon, especially as the evolution of financial technology rapidly develops the ways in which consumers qualify for loans and borrow money.
We live in a small world in many ways, particularly among developed countries with sophisticated financial markets. While the impact of the Biden administration on global financial markets could be more muted than past changes of administration in the US, the impact will be felt and noticed. As a result, Australian RMBS and ABS issuers and investors should keep a close eye on the development of new regulation and policy in the US.
Originally published by Australian Securitisation Journal.
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